Recent employment scandals, such as the systemic underpayment of workers by 7-Eleven Franchisees and reports of exploitation of temporary work visa holders, has prompted the Federal Government to introduce new legislation aimed at protecting vulnerable workers.

The bad news for Franchisors is that the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Bill), which was introduced to Parliament on 1 March 2017, proposes to hold Franchisors liable for Franchisees’ failure to pay employees appropriately.

What are the risks?

If the Bill is passed in its current form, Responsible Franchisor Entities will become liable for contraventions of the Fair Work Act 2009 (Act) by Franchisees where they knew or could reasonably be expected to have known that the contravention (or contravention of a similar nature) by the franchisee entity would occur.

The major risk to Franchisors lies in the objective test of “could reasonably be expected to have known.” Actual knowledge of the Franchisee’s wrongdoing is not a prerequisite to liability. No order needs to have been made against a Franchisee before a Franchisor can also be held responsible.

The types of breaches of the Act which are covered by this new provision extend beyond underpayment of employees and include a large number of additional workplace law compliance areas.

In addition to civil penalties (which are also being increased under the Bill), Franchisors can be required to directly compensate underpaid employees of a Franchisee.

Why franchisors?

The Bill singles out employees of franchise networks as ‘vulnerable workers’. It is intended to target the practices of franchise networks that operate on a business model based on underpaying workers and ensure that Franchisors cannot turn a ‘blind eye’ to Franchisee’s conduct.

Despite this, the new sections will apply to all Franchisors including SMEs.

Presently, a Franchisor who is ‘involved in’ contraventions of the Act, that is to say they actually knew of a contravention, can be held liable. The new rules will mean that Franchisors have to monitor compliance by Franchisees to ensure they do not get caught out.

This type of ‘joint employer’ obligation is bad news in the franchising context as it significantly increases a Franchisor’s responsibility for the independent businesses operating in its network. It also creates further compliance costs in a business environment that is already highly regulated.

What can franchisors do about it?

The Bill allows Franchisors to avoid liability where they have taken ‘reasonable steps’ to prevent the kind of contraventions which occurred.

What is considered reasonable will depend upon the circumstances. Guidance in the proposed section states that a court may have regard to the size and resources of the franchisor, the extent of the franchisor’s influence, and arrangements for assessing franchisee’s compliance with the Act.

If you have concerns about the impact this legislation will have on your business as a Franchisor, the Franchising Council of Australia has an information page at https://www.franchise.org.au/fair-work.html with a template letter which can be used to express any concerns to your local Member of Parliament.

Where to from here?

We will keep you updated as the legislative process unfolds.

In the meantime, Franchisors should start thinking about their compliance strategies and how to best implement any changes within their networks.